How Singapore's new rate will change the S$3.5 trillion derivatives market

With the first interest rate swap transaction referencing the new Singapore Overnight Rate Average, the island state hopes to stay ahead of regional peers.

The long, drawn-out death of the Interbank Offered Rate (IBOR), which has been felt across the world, continues. But Singapore is pushing ahead with the new rates in a way that could give its derivatives market the edge.

The first Singapore dollar interest rate swaps referencing the Singapore Overnight Rate Average (SORA) was recently cleared between Standard Chartered and OCBC.

Although derivate transactions rarely make headline news, the move to use SORA is a milestone for the S$3.5 trillion ($2.5 trillion) Singapore dollar derivatives market.

The rate at which banks lend to each other has been on its last legs since the summer of 2018 following an international scandal surrounding the London Interbank Offered Rate (LIBOR). Very quickly, Andrew Bailey, chief executive of British financial regulatory body the Financial Conduct Authority, drew a line in the sand.

“I hope it is already clear that the discontinuation of LIBOR should not be considered a remote probability black swan event. Firms should treat it is as something that will happen and which they must be prepared for,” he said.

UK financial regulators made it clear that LIBOR was on its way out and that the transition must complete by the end of 2021.

Around the world, regulators have followed suit and have been looking for a replacement. But while those in the US, Europe and Britain quickly moved to bring in the Secured Overnight Financing Rate (SOFR), Euro Short Term Rate (€STR) and Sterling Overnight Index Average (SONIA), Asian regulators have lagged.

“A lack of centralised consensus and uniform regulatory measures amongst Asian regulators has left Asia’s emerging economies in the cold,” wrote Pauline Pélissier, a director of financial services consulting at Mazars Financial Services in London, in a note earlier this year.

At first glance, Hong Kong appears ahead of the game at the moment.

At the end of October last year, Tradition, the interdealer broking arm of Compagnie Financière Tradition, announced its first interest rate derivative trade related to Hong Kong Dollar Overnight Index (HONIA) rather than the old Hong Kong Interbank Offered Rate (HIBOR) rate.

“We believe [that this] will add stability and transparency," said managing director Michael Poon.

But with Hong Kong regulators planning on running HIBOR and HONIA in parallel with each other, there are few incentives to shift to the new rate.


Singapore has taken a different approach.

At the end of August it said that it was planning to shift from the Singapore Dollar Swap Offer Rate (SOR) to SORA and the Association of Banks in Singapore launched a roadmap for transition.

Crucially, it made clear that a transition was non-negotiable.

“The Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee have concluded that financial contracts that reference SOR, particularly SGD interest rate derivatives, should transition to reference SORA,” it said as it announced an industry-led steering committee, chaired by Samuel Tsien, group chief executive of OCBC Bank and chairman of the Association of Banks in Singapore.

“It is critically important for Singapore’s financial industry to achieve a smooth transition to SORA in advance of the likely discontinuation of SOR after end-2021,” said Tsien at the time.

“The key priority is to ensure financial institutions and our end customers are well-prepared for this transition, and customers are able to make informed choices which will have an impact on their financing,” he added.

Since then, a number of financial institutions in the island state have undertaken SORA-derivative transactions

The first was an overnight indexed swap (OIS) derivatives transaction between Standard Chartered and OCBC in mid-November last year.

“The financial industry needs to… build a liquid market to allow for an easier transition to SORA,” said Kun Kin Lam, head of global treasury and investment banking at OCBC Bank.

And in early May, DBS successfully priced the industry’s first SORA-referenced floating rate notes under its $30 billion global medium-term note programme.

The S$20 million one-year paper has a coupon of SORA plus 0.65%.

With the first Singapore dollar interest rate swaps deal referencing SORA, the island-state wants to make sure that it remains at the forefront of derivatives trading.

“This is a major milestone – it is an important enabler that will allow key local and international banks to step up their efforts to build a vibrant SORA derivatives market,” said Daniel Koh, global head of treasury markets at Standard Chartered Bank, who also chairs the steering committee’s work on SORA derivatives. “This will help broaden participation in SORA derivatives trading, enhance price discovery, and facilitate the transition of legacy SOR derivatives to SORA.”


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